Is it (Butter) worth suing Insurance Brokers and not Insurers?
Dalamd Limited v Butterworth Spengler Commercial Limited  EWHC 2558 (Comm)
A High Court insurance brokers' negligence case, notable for confirming the causation of loss principles to be applied, but with ramifications for future insurance coverage and insurance brokers' negligence claims.
Background and alleged breach of duty
JL Sorting Limited ("JLS") operated a recycling business on the premises owned by Widnes Land Partnership LLP ("Widnes"). Widnes obtained buildings insurance from Aviva, and JLS obtained plant and machinery insurance from XL. All the insurances were obtained via a broker, Butterworth Spengler Commercial Limited ("Butterworth").
On 21 October 2012, a fire broke out at Widnes' premises and spread, via bales of combustible plastic that were stored close to the buildings. Widnes and JLS sought indemnity under their respective insurance policies with Aviva and XL. However cover was declined and/or avoided by insurers. Aviva declined Widnes's claim on the grounds that Widnes was in breach of an External Storage Condition relating to combustible materials in the policy, and the policy was voidable for non-disclosure of the fact that Widnes was a "phoenix" company having purchased the business of a company which had gone into liquidation. XL refused to pay JLS's claim on the grounds that it was entitled to avoid for misrepresentation and non-disclosure relating to a variety of matters.
Widnes and JLS subsequently assigned their claims to Dalamd, which became the Claimant in this action. Dalamd did not commence coverage proceedings against either insurer, and only brought a claim in negligence against Butterworth. Dalamd alleged that Butterworth was responsible for the grounds of declinature relied on by Aviva because i) Butterworth failed to give adequate advice in relation to the meaning and effect of the External Storage Condition, and ii) Butterworth failed to give adequate advice regarding the duty of disclosure. Butterworth denied that it was in breach of duty, and asserted that Widnes had never had a valid claim under the Aviva policy because it was Widnes's own fault that it was in breach of the External Storage Condition. It was also alleged that Butterworth was responsible for the grounds of declinature relied upon by XL, because it had failed to give adequate advice in relation to the duty of disclosure. Butterworth denied that it was in breach of duty, but also denied that XL was entitled to avoid the policy – essentially arguing that the insured did have cover and that therefore it had suffered no loss.
The Judge held that Butterworth had not been in breach of duty in relation to advice about the External Storage Condition, but that it had been in breach of its duty to advise both Widnes and JLS regarding the duty of disclosure.
What is the right approach to causation?
There was a dispute between the parties about the proper approach to questions of causation in this type of claim, where the insured has not received an expected indemnity from insurers allegedly as a result of a broker's negligence. Butterworth contended that the question of whether there would have been cover absent the alleged breaches should be decided on the balance of probabilities. Dalamd contended that it should be dealt with on a loss of a chance basis.
The Judge reached the following conclusions. On the question of the correct approach to causation, the Judge agreed with Butterworth. In order to succeed, the claimant (the former insured) needed to show that its claim for indemnity against the insurer would have failed as a result of the broker’s negligence. Therefore, the question for the court was whether, on the balance of probabilities, the insured’s claim for indemnity against the insurer would have failed. This is a binary 'yes or no' outcome. If 'yes' then causation is proven. If 'no' then the negligence claim fails at the causation hurdle and no compensation can be recovered.
Dalamd had argued that it was sufficient for the insured to prove that the broker’s negligence had provided the insurer with a "reasonably arguable" ground to decline or avoid the claim for indemnity. The Judge rejected that argument. However, the Judge did state that the position was different where the broker’s negligence had caused the insured’s position to be uncertain, with the result that the insured had entered into a reasonable settlement with the insurer. In that scenario it is open to the insured to sue the broker for the difference between the amount of the settlement and the full claim under the policy, without having to prove that the insurer’s defence for which the broker was responsible was a good one.
The Judge confirmed that in situations where on the facts there was some other reason why the insurance would not have provided an indemnity (that is, a ground of declinature or avoidance for which the broker was definitely not responsible), the question of causation also fell to be decided on the balance of probabilities, rather than on a loss of a chance basis. Therefore if a Court decides on the facts that the insured’s insurance would not have responded in any event, then the negligence claim against the broker fails on causation grounds.
However, there remains one potential situation where 'loss of a chance' would apply. There could be situations where, despite its strict legal rights, the insurer would nevertheless have decided not to refuse the insured’s claim. In this scenario, damages would fall to be assessed on a loss of a chance basis, reflecting the chance that (absent the broker’s negligence) the insurer would have paid some or all of the claim, notwithstanding its strict legal right to decline an indemnity.
Based on these principles, the Judge found as a fact that there was a breach of the External Storage Condition, which entitled Aviva to decline the claim. Therefore the Widnes part of the claim failed, because Butterworth was not negligent in relation to that ground of declinature. The Judge found that there was no chance that (absent Butterworth's negligence relating to the duty of disclosure) Aviva would have paid some or all of the claim. As for the JLS part of the claim, the Judge found that the non-disclosures by JLS for which Butterworth was responsible were sufficient to entitle XL to avoid the policy for material non-disclosure. While there were some additional non-disclosures for which the Broker was not responsible, these did not provide valid grounds entitling XL to avoid the policy.
As a result, Dalamd recovered nothing at all in relation to the Widnes/Avivia parts of the claim. However, the JLS part of the claim for damages for the loss of an indemnity from XL succeeded. Dalamd therefore recovered damages in the amount of the value of JLS's lost plant and machinery, which came to £1,600,000.
Implications for insurance brokers' risk management
Decided cases on insurance brokers' negligence are always an opportunity to look for 'risk management' lessons that can be applied to help prevent future claims. This case serves as a reminder that it is always worth going 'back to basics' in terms of risk management. The broker's own duty of disclosure and the duty to advise the insured client on its own duty of disclosure are a core part of the role, yet unfortunately the broker was found to be in breach on this case.
Implications for insurance coverage disputes and broker's negligence disputes
Dalamd confirms that the Court must determine on the balance of probabilities ('yes or no') whether matters/breaches for which the broker was responsible were the only grounds for the insurer to refuse to pay the claim. If not, the negligence claim fails.
The upshot is that if the disappointed insured only sues the broker in negligence, and does not also bring a coverage claim against insurers, then the insured claimant takes on the burden of proof of showing what the insurers' grounds for declinature were, why they were correct and why the broker was responsible for them. This is a potentially difficult burden to discharge. The insured will inevitably have previously been putting forward evidence and arguments to the contrary to the insurer, so there is a credibility issue for the insured. Also the insured would require witness evidence and documentation from their former insurer to be able to provide the relevant proof regarding declinature, and after a pre-action coverage dispute the insurer may be reluctant to cooperate, especially if any of the evidence could be commercially sensitive for the insurer.
By contrast, if the disappointed insured brings a coverage claim against the insurers, and also brings in the broker as a defendant in a negligence claim in the alternative, then the question of declinature is arguably more straightforward to deal with, not least because the insurer itself will take conduct of the arguments for declinature. The practical upshot is that unless the insurer's declinature argument is almost unarguably correct, then there are considerable benefits for claimant insureds to bring a coverage claim and a negligence claim at the same time, and significant risks to bringing a negligence claim alone. In turn, combined coverage and negligence claims are likely to become even more usual, with all the costs implications that tri-party claims inevitably have.
A further potential ramification is that negotiated settlements of insurance coverage disputes are likely to become even more attractive. If insurers and insureds know that a failure to reach a settlement of a declinature dispute will almost inevitably lead to the insured being forced to bring a coverage claim and join in the broker in negligence, then there is a greater incentive to settle. Therefore even apparently strong and well-reasoned declinatures are unlikely to be the end of the matter for insurers in the future.
Finally, it is important to note that the applicable insurance law in Dalamd was the pre-Insurance Act 2015 law. As a result, the proportionate remedies under IA2015 were not under consideration. Dalamd has given clear guidance about the causation principles applying where an insurer has simply completely avoided the policy. However, applying these principles in the post IA2015 landscape where proportionate remedies are also available could prove very complicated, particularly where they intersect with 'loss of a chance' arguments that an insurer would have generously agreed to some coverage rather than stand on its strict rights.
For all these reasons, where a policy was placed via a broker and a coverage dispute arises, and particularly where IA2015 applies, insurers and brokers (and the professional indemnity insurers of brokers) are likely to benefit from early specialist legal advice from advisers experienced in both insurance coverage and insurance brokers' negligence litigation. In higher value cases, this could give the best prospect of resolving all the disputes at an early stage and avoiding becoming embroiled in expensive and protracted tri-party litigation.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.